Published 2/1/2009
Jennifer A. O’Brien, MSOD

No such thing as minor adjustments

By Jennifer A. O’Brien, MSOD

Tips to improve your net collections ratio

“We have a net collections ratio of 99 percent!” the physician partner declared confidently during a recent revenue cycle consultation.

“No, you don’t,” I responded sadly. “Your staff has been writing off everything the payors don’t allow to ‘contractual adjustments.’ Your real net collections ratio is much lower; the calculation is flawed by these inaccurate adjustments.”

The same situation could be occurring in your practice as well. “Adjustments,” or “write offs” as they are also called, are the dollars that are “adjusted” or “written off” a patient account for any reason. Most practices overlook the importance of accurate, detailed adjustments and end up with flawed financial reporting and assumptions—including incorrect net collections ratios.

The net collections ratio is that percentage of total collectable money that the practice successfully collected (total collections minus refunds divided by total charges minus contractual and coding adjustments). Orthopaedic practices should have a net collections ratio of 95 percent or higher, according to KarenZupko & Associates. Medical Group Management Association surveys find that the average net collections ratio for an orthopaedic surgery practice is just under 95 percent. Net collections should be calculated monthly, with a review for trend changes every 3 months.

Contractual adjustments
The contractual or carrier allowable adjustment is the most common type of adjustment. In this situation, the practice fee is higher than the contracted fee under an insurance arrangement. The difference between the practice fee and the contracted fee is adjusted off the patient account.

For example, the practice fee for a service is $1,000. The contracted allowable is $800, with the insurer paying $640, and the remaining 20 percent of the contracted allowable amount paid by the patient as coinsurance. The $200 difference between the $1,000 charge and the $800 collected is adjusted off the patient account as a contractual discount under the plan.

Because contractual adjustments are a fact of life, practices should load all of their contracted payment schedules into their practice management information system (PMIS). Each time a payment is posted, the contract amount will appear so staff can easily confirm that the correct amount was paid.

An alternative is to create a spreadsheet for high-volume payors and frequently used Current Procedure Terminology (CPT) codes so staff can check the accuracy of the allowable and payment. Additionally, the adjustment code should specify the plan so that the practice can identify the percentages and amounts being written off under each contract.

Coding adjustments
Another adjustment standard to a surgical practice is coding-specific, such as the “multiple procedure adjustment.” When a modifier 51 is applied to subsequent procedures done in the same operative session, the practice can expect the first CPT code to be paid at 100 per­cent of the contracted amount and the second and subsequent CPT codes to be paid at 50 percent of the contracted amount.

In this case, the difference between the charge and the allowed amount is adjusted off to a carrier-specific, contractual adjustment category, as in the example above. The difference between the contracted payment for the second procedure and the 50 percent that was allowed, however, would be adjusted off to a multiple-procedure discount adjustment category.

If the payor inappropriately denies payment for the second procedure, do not make the mistake of writing off the entire denial as a contractual adjustment. If you do, you compromise your data and your practice will appear to have a higher net collections ratio than it actually does.

Identifying types of adjustments
Contracted and code-specific adjustments illustrate the importance of accurately identifying adjustments. These transactions allow your practice to accurately determine the success of your reimbursement systems, the integrity of contracts and payors, and opportunities for system improvements and changes.

Many practices do not have a comprehensive list of adjustment codes (Table 1) loaded into their PMIS. In other practices, staff has not been recently trained (or retrained) in how to properly identify and post the different types of adjustments. The result is erroneous reports.

Tips for better tracking
The following recommendations will help your practice improve adjustment tracking:

  • Load all carrier allowables and payment schedules into the PMIS. Each time a payment is posted, the carrier allowable should appear so staff can confirm that the correct amount was paid. Fee schedules for many payors are available online.
  • Create a complete list of adjustment codes. Having a unique adjustment category for each contracted and governmental payor enables you to accurately monitor plan profitability.
  • Train and retrain staff about how to post all types of adjustments. Simply loading the payment schedules and the adjustment codes into the system is not enough. Encourage question-asking; worry if questions don’t come up. Active management, regular monitoring, and periodic retraining are required, not optional, particularly with staff turnover and other organizational changes.
  • Create standard operating procedures (SOPs) for handling adjustments. Document and illustrate the specifics of accurate adjustments posting by using SOPs in staff training sessions and as references. Committing the procedures to paper is a valuable and visual exercise in working through how adjustments are made.
  • Assign specific authorities for certain types of adjustments. Not all staff should have the authority to make all types of adjustments. Certain types of adjustments—especially unapplied credit and small balances—present opportunities for embezzlement. Be sure the SOPs include specific checks and balances for these types of adjustments and provisions for approval and monitoring by a manager or physician. Adjustments for accounts being sent to collection agencies should require approval by a physician.
  • Review the adjustment summary report each month. The practice administrator and the managing partner should have the responsibility of reviewing the adjustment summary. Monitor total adjustments according to type and compare the adjustment summary to a similar time period. Look for significant changes and exceptionally high or low adjustment totals. Low totals in certain types of adjustment categories can indicate that staff are not posting accurately. Practices that use a billing service should also review the adjustments taken and the reasons why.

Business discipline will pay off. As the economy tightens and margins shrink, practices that used a general “insurance write-off” category will likely find this an expensive mistake.

Jennifer O’Brien, MSOD, is the Executive Director of Arkansas Specialty Orthopaedics. She previously was a consultant with KarenZupko & Associates, Inc.